With a new tax year and having had a new Government who has made some significant tax changes, which come into effect this month, impacting both businesses and individual taxpayers, we have set out below a summary of the changes, that will impact our client base below.
DIVIDEND INCOME TAX RATES
There was a 2% increase in the dividend income tax rate at the basic and higher rate level. The rates of tax on dividends for 2026-27 has increased to 10.75% at the basic rate and 35.75% for the higher rate. The additional rate will remain 39.35%.
In addition to an increase in the tax rates, when reporting dividends in the 2026 self-assessment tax return, HMRC require more details. Historically dividend income has been reported as untaxed income within the main body of the return in the section “UK interest and dividends.” All dividends were reported as one figure, irrespective of which company has paid them. This means historically HMRC has had no direct ability to see what you have drawn from your own company, without connecting back to the company’s accounts and returns. In the 2026 return, those who receive dividends from their own company, are required to report the dividend received separately on their employment page of the return (box 7.3). Reporting dividends on a tax return page relating to employment might seem a little odd, but from HMRC’s perspective, easier to join up how the business owner is extracting profits from their company.
OVERDRAWN DIRECTORS’ LOAN ACCOUNT TAX CHARGE
In line with the increase in dividend income tax rates, the tax charge on loans made to directors/participators by close companies (known as section 455 tax) will increase by 2% from 33.75% to 35.75% for loans made on or after 6 April 2026.
Not a real tax, as provided the loan is repaid, the section 455 tax is refunded, but it is a cashflow/ timing issue, due to the period of time before the repayment is made.
BUSINESS ASSET DISPOSAL RELIEF (BADR)
Business asset disposal relief (BADR), increased from 14% to 18% for any qualifying disposal made from 6 April 2026 onwards subject to the £1m lifetime allowance.
FROZEN TAX THRESHOLDS
There is the continuation of the freeze to personal tax thresholds, currently planned until 2031, as well as the inheritance tax nil rate band, which remains at £325,000. The personal allowance is unchanged at £12,570, with the higher rate 40% tax threshold at £50,271, and 45% rate on earnings above £125,140, as before.
In Scotland, there are changes due to a 7.4% rise in the basic tax threshold, while the higher, advanced and top rate thresholds for income tax will be frozen. This means that the starter rate of 19% in Scotland, which is lower than the UK standard, which now starts from £12,570 to £16,537, and the basic band from £16,538 - £29,526 for the 20% rate.
INHERITANCE TAX (“IHT”) - BUSINESS PROPERTY RELIEF AND AGRICULTURAL PROPERTY RELIEF
Effective 6 April 2026, for privately owned businesses and farmers the allowance for the 100% rate of IHT relief will be set at £2.5m on the (combined) value of property with a 50% rate of relief thereafter, i.e. IHT being paid at a reduced rate of 20%, not 40%, on qualifying assets above £2.5m.
This means a couple will be able to pass on up to £5m of agricultural or business assets between them, on top of the existing allowances such as the nil-rate band.
The revision applies to married couples and civil partners, and siblings, according to the examples in the government announcement. But unmarried couples will only qualify for the £2.5m threshold, not the combined figure of £5m.
MAKING TAX DIGITAL FOR INCOME TAX FOR £50K COHORT
The first wave of mandatory quarterly reporting under Making Tax Digital (MTD) for Income Tax starts with registration now required for sole traders and landlords with qualifying income of over £50,000 based on the tax year 2024-25 figures. The first quarterly reporting deadline is Friday 7 August 2026.
VENTURE CAPITAL TRUSTS (VCT)
The rate of income tax relief for VCT has reduced from 30% to 20%.
ENTERPRISE INVESTMENT SCHEMES (EIS)
The qualifying tests for EIS companies based in Great Britain (not Northern Ireland) expanded from 6 April.
- The gross assets test before investment into non-Northern Irish companies will double from £15m to £30m, and;
- The gross assets test immediately following investment will more than double from £16m to £35m.
Companies can raise up to £10 million per year doubling up on the previous £5 million limit, while knowledge-intensive companies can raise up to £20 million per year (previously £10 million).
Investment limits for individual investors are unchanged.
ENTERPRISE MANAGEMENT INCENTIVES (EMI)
EMI share option schemes, used to incentivise employees by granting options enabling them to buy shares at a future date at a predetermined price, have had their qualifying conditions enhanced.
EMIs are now available to be used by independent quoted or unquoted companies with group gross assets of £120m (previously the limit was £30m or less).
CAPITAL ALLOWANCES
Capital allowances are being reduced, effectively raising tax payable, with the main rate of writing-down allowance for plant or machinery cut from 18% to 14% for chargeable periods starting on or after 1 April 2026 for corporation tax, and from 6 April for income tax purposes.
The government tried to soften the blow when the chancellor first announced this measure with a new 40% first-year allowance for main rate assets effective from 1 January 2026, for businesses unable to claim full expensing such as unincorporated businesses or leasing and hire businesses. The 100% first-year allowance for zero-emission cars and EV charge points is also extended until March/April 2027.
PENALTIES FOR LATE FILING OF CORPORATION TAX RETURNS
For corporation tax returns with a filing date on or after 1 April 2026, penalties will double: £200 for initial late filings late by one day, up from previous £100; and £400 for those over three months late, up from £200. Three successive failures where the return is more than three months late will now incur a penalty of £2,000, which is double the £1,000 penalty in force in the 2025-26 tax year.
CAR TAX
Vehicle excise duty (VED) rates (car tax rates) are automatically adjusted annually in line with inflation each year. From 1 April 2026, the standard tax rate for all petrol, diesel or hybrid cars registered after 1 April 2017 rises to £200, from the previous £195 rate.
However, for those with more expensive cars priced at over £40,000 (£50,000 for electric vehicles), the VED rate is £640. In addition, electric cars no longer qualify for free road tax and will pay the same £200-a-year flat rate as petrol and diesel drivers after a first year concession rate of £10.
CONSTRUCTION INDUSTRY SCHEME (CIS)
From 6 April 2026, contractors operating under CIS are legally required to submit a monthly CIS return, even when no subcontractors have been paid.
The new rules bring CIS in line with VAT, in that if HMRC suspects fraud has occurred related to CIS at any point in the supply chain, it will now be able to immediately cancel the gross payment status for those who qualify for this, and the taxpayer could be liable for penalties of 30% of the lost tax.
Should you need to discuss the recent changes, or anything else in respect of you and/or your business, please do not hesitate to contact our offices.
